Accounting as a competitive weapon. (CEO Journal).

When a CEO wants to facilitate change, it always is best to remember the powerful implications of this simple set of facts:

* employees will pay the most attention to what the CEO pays the most attention to.

* employees will care the most about the things they know the CEO cares the most about.

How do employees know when a CEO is really "paying attention" to something, or that he or she "cares the most" about something? When a CEO insists that it be measured and tracked, that's how,

Traditional financial accounting was developed a century ago to track financial performance. Cost accounting was subsequently developed as a way to measure and track manufacturing performance, specifically manufacturing costs--labor, materials and overhead. By virtue of these performance measures and measurement systems, CEOs made it clear to their employees that what they paid attention to were higher income and lower costs. This continues to be the case today.

While the principles of financial accounting--and performance measures such as income and cash flow statements--remain an elemental part of effective management, many enlightened manufacturers have come to question the value of traditional cost accounting as a means of measuring manufacturing performance. It is now widely believed that a cost-driven approach to manufacturing management (and management accounting) ultimately leads to poor business performance.

Specifically, experience now shows that cost reduction, for decades the universal objective of manufacturing performance, actually hampers a company's ability to achieve the far loftier values of higher productivity, improved quality, shorter cycle times, and higher levels of customer satisfaction and retention. Paradoxically, that same experience also shows that improvements in quality and reductions in cycle times actually do drive costs lower and enhance customer satisfaction and retention, Improvements in these areas also have been shown to do more than anything else to attract prospective customers seeking stable supplier relationships.

From this background it should be clear that a world class foundry management accounting system focuses on cycle times and quality and measures cost as an effect of manufacturing excellence rather than as its cause, The foundry that operates such an accounting system will achieve a competitive advantage.

A management accounting system drives fundamental manufacturing performance improvements that customers can see and measure (improved quality and shorter cycle times). This will ultimately result in the lowest total cost of production. A world class management accounting system also:

* fosters intra-functional integration to optimize total business performance and the achievement of the company's strategic plan. For example, departmental cost reports should be replaced with team-based and overall manufacturing performance reports;

* provides feedback on the gaps between best-in-class performance and the foundry's own performance over time;

* promotes learning and highlights opportunities for improvement. For instance, measures should capture the outcomes of processes, not just their cost;

* is multifaceted, meaning that the number and definition of metrics (items to be measured) are unique to each situation.

Accounting Methodologies

Two key methodologies are currently in use to drive improvements in management accounting and manufacturing performance measurement.

First is activity-based costing, where cycle times, costs and revenues are associated with, allocated to and measured for activities rather than departments. Activity-based systems are founded upon the principle that activities consume resources and products consume activities. Activity-based information can focus a CEO's attention on the underlying drivers of cost and profitability, which vary by activity and are not limited to traditional measures like direct labor hours.

Second are the various tools used to map processes, account for the time spent on various activities and distinguish "value" adding activities. The focus here is on activities, not departments, and customer-oriented results rather than internally-oriented costs. In addition to being a cornerstone of the new management accounting, process mapping is the critical first step to reducing cycle times and is also a key to boosting the productivity of non-manufacturing workers.

It remains true that competitive advantage can be found in every facet of a foundry business. Though admittedly not very sexy, none are more important for the CEO to be thinking about than that which can be found in enlightened management accounting.